Term of the day

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Subordinated Debt

DEFINITION of 'Subordinated Debt'
A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings.

Also known as a "junior security" or "subordinated loan."

INVESTOPEDIA EXPLAINS 'Subordinated Debt'
In the case of default, creditors with subordinated debt wouldn't get paid out until after the senior debtholders were paid in full. Therefore, subordinated debt is more risky than unsubordinated debt.

bigbadwolf

Then preferred stocks, and lastly common stock.

lilitulip

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Trailing Twelve Months - TTM

DEFINITION of 'Trailing Twelve Months - TTM'
The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation of its financial performance for a 12-month period, but typically not at its fiscal year end. Since quarterly reports rarely report how the company has done in the past 12 months, TTM tends to be calculated manually or found on various websites.

INVESTOPEDIA EXPLAINS 'Trailing Twelve Months - TTM'
Trailing 12 months figures can be calculated by subtracting the previous year's results from the same quarter as the most recent quarter reported and adding the difference to the latest fiscal year end results.

TTM figures are also often used to calculate financial ratios. For example, the price/earnings ratio is often quoted as P/E (ttm), meaning they're using the EPS from the past 12 months.

zhao

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Unearned Revenue

DEFINITION of 'Unearned Revenue'
When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can be thought of as a "pre-payment" for goods or services which a person or company is expected to produce to the purchaser. As a result of this prepayment, the seller now has a liability equal to the revenue earned until deliver of the good or service.

INVESTOPEDIA EXPLAINS 'Unearned Revenue'
From an accounting perspective, unearned revenue is a double-edged sword. The early cash flow to the firm is advantageous for any number of activities, such as paying interest on debt to purchasing more inventory. However, by accepting unearned revenue, the firm has then entered a legal obligation to deliver on the terms of the payment. For example, with a prepayment on a lease contract, the revenue is a liability until it has been earned.

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Capital Stock

DEFINITION of 'Capital Stock'
The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents the size of the equity position of a firm and can be found on the balance sheet (or notes) of a typical financial statement. Firms can both issue more capital stock, or buyback shares that are currently owned by shareholders.

INVESTOPEDIA EXPLAINS 'Capital Stock'
In financial statement analysis, an increasing capital stock account tends to be a sign of economic health, since the company can use the additional proceeds to invest in projects or machinery that will increase corporate profits and/or efficiency. On the other hand, however, firms that continually issue secondary issues of capital stock may be doing so to raise funds, due to poor company performance.

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Standard Error

DEFINITION of 'Standard Error'
The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the accuracy with which a sample represents a population. In statistics, a sample mean deviates from the actual mean of a population; this deviation is the standard error.

INVESTOPEDIA EXPLAINS 'Standard Error'
The term "standard error" is used to refer to the standard deviation of various sample statistics such as the mean or median. For example, the "standard error of the mean" refers to the standard deviation of the distribution of sample means taken from a population.

The smaller the standard error, the more representative the sample will be of the overall population. The standard error is also inversely proportional to the sample size; the larger the sample size, the smaller the standard error because the statistic will approach the actual value.

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Redemption

DEFINITION of 'Redemption'
The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units in a mutual fund. A redemption occurs, in a fixed income security at par or at a premium price, upon maturity or cancellation by the issuer. Redemptions occur with mutual funds, at the choice of the investor, however limitations by the issuer may exist, such as minimum holding periods.

INVESTOPEDIA EXPLAINS 'Redemption'
Redemption of mutual fund shares from a mutual fund company must occur within seven days of receiving a request for redemption from the investor. Some mutual funds, may have redemption fees attached, in the place of a back-end load. It is important to note which units should be redeemed when choosing to sell mutual funds within a portfolio.

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Cyclical Stock

An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession. Contrast cyclical stocks with counter-cyclical stocks, which tend to move in the opposite direction from the overall economy, and with consumer staples, which people continue to demand even during a downturn.

INVESTOPEDIA EXPLAINS 'Cyclical Stock'
Cyclical stocks rise and fall with the business cycle. This seeming predictability in the movement of these stock's prices leads some investors to try to time the market by buying these stocks at the low point in the business cycle and selling them at the high point. Examples of companies whose stocks are cyclical include car manufacturers, airlines, furniture retailers, clothing stores, hotels and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their home furnishings, go shopping and travel. When the economy is doing poorly, these discretionary expenses are some of the first things consumers will cut. If a recession is bad enough, cyclical stocks can become completely worthless as companies go out of business.

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Coupon

DEFINITION of 'Coupon'
The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually.

This is also referred to as the "coupon rate" or "coupon percent rate."

INVESTOPEDIA EXPLAINS 'Coupon'
For example, a $1,000 bond with a coupon of 7% will pay $70 a year.

It is called a "coupon" because some bonds literally have coupons attached to them. Holders receive interest by stripping off the coupons and redeeming them. This is less common today as more records are kept electronically.

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Supply

DEFINITION of 'Supply'
A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.

INVESTOPEDIA EXPLAINS 'Supply'
Supply and demand trends form the basis of the modern economy. Each specific good or service will have its own supply and demand patterns based on price, utility and personal preference. If people demand a good and are willing to pay more for it, producers will add to the supply. As the supply increases, the price will fall given the same level of demand. Ideally, markets will reach a point of equilibrium where the supply equals the demand (no excess supply and no shortages) for a given price point; at this point ,consumer utility and producer profits are maximized.

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Ghosting

DEFINITION of 'Ghosting'
An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. Ghosting is used by corrupt companies to affect stock prices so they can profit from the price movement.

INVESTOPEDIA EXPLAINS 'Ghosting'
This practice is illegal because market makers are required by law to act in competition with each other. It is known as "ghosting" because, like a spectral image or a ghost, this collusion among market makers is difficult to detect. In developed markets, the consequences of ghosting can be severe.

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Minority Interest

DEFINITION of 'Minority Interest'
1. A significant but non-controlling ownership of less than 50% of a company's voting shares by either an investor or another company.

2. A non-current liability that can be found on a parent company's balance sheet that represents the proportion of its subsidiaries owned by minority shareholders.

INVESTOPEDIA EXPLAINS 'Minority Interest'
1. In accounting terms, if a company owns a minority interest in another company but only has a minority passive position (i.e. it is unable to exert influence), then all that is recorded from this investment are the dividends received from the minority interest. If the company has a minority active position (i.e. it is able to exert influence), then both dividends and a percent of income are recorded on the company's books.

2. If ABC Corp. owns 90% of XYZ inc, which is a $100 million company, on ABC Corp.'s balance sheet, there would be a $10 million liability in minority interest account to represent the 10% of XYZ Inc. that ABC Corp does not own.

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Fixed Income

A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels. Fixed-income budgeters and investors are often one and the same - typically retired individuals who rely on their investments to provide a regular, stable income stream. This demographic tends to invest heavily in fixed-income investments because of the reliable returns they offer.

INVESTOPEDIA EXPLAINS 'Fixed Income'
Individuals who live on set amounts of periodically paid income face the risk that inflation will erode their spending power. Fixed-income investors receive set, regular payments that face the same inflation risk.

The most common type of fixed-income security is the bond; bonds are issued by federal governments, local municipalities or major corporations.

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DEFINITION of 'Funds From Operations - FFO'
A figure used by real estate investment trusts (REITs) to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis.

INVESTOPEDIA EXPLAINS 'Funds From Operations - FFO'
The FFO-per-share ratio should be used in lieu of EPS when evaluating REITs and other similar investment trusts.

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Marginal Propensity To Consume - MPC

DEFINITION of 'Marginal Propensity To Consume - MPC'
The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line- a sloped line created by plotting change in consumption on the vertical y axis and change in income on the horizontal x axis.

The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.

INVESTOPEDIA EXPLAINS 'Marginal Propensity To Consume - MPC'
Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500). This also means that your marginal propensity to save will be 0.2 ($100 divided by $500).

If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500). The other side of marginal propensity to consume is marginal propensity to save, which shows how much a change in income affects levels of saving. Marginal propensity to consume + marginal propensity to save = 1.

Given data on household income and household spending, economists can calculate households’ MPC by income level. This calculation is important because MPC is not constant; it varies by income level. Typically, the higher the income, the lower the MPC, because as wealth increases, so does the ability to satisfy needs and wants, so each additional dollar  is less likely to go toward additional spending.

According to Keynesian theory, an increase in production increases consumers’ income, and they will then spend more. If we know what their marginal propensity to consume is, then we can calculate how much an increase in production will affect spending. This additional spending will generate additional production, creating a continuous cycle. The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment.

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DEFINITION of 'Pork-Barrel Politics'
A slang term used when politicians or governments "unofficially" undertake projects that benefit a group of citizens in return for that group's support or campaign donations. This spending mostly benefits the needs of a small select group despite the fact that the entire community's funds are being used.

Also referred to as "patronage".

INVESTOPEDIA EXPLAINS 'Pork-Barrel Politics'
For example, let's say a city has a large number of potholes, spread evenly throughout its communities. If the mayor took campaign contributions from a group of wealthy residents in exchange for a promise to fix the potholes in their neighborhood first, this would be pork-barrel politics.

One possible derivation for the phrase comes from the practice of country stores keeping a barrel of salted pork open and available to the public. Certain high-ranking citizens would come by daily to dip into this common fund.

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DEFINITION of 'Notional Value'
The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position (and have a large consequence for the trader).

INVESTOPEDIA EXPLAINS 'Notional Value'
For example, one S&P 500 Index futures contract obligates the buyer to 250 units of the S&P 500 Index. If the index is trading at $1,000, then the single futures contract is similar to investing $250,000 (250 x $1,000). Therefore, $250,000 is the notional value underlying the futures contract.

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DEFINITION of 'Product Line'
A group of related products manufactured by a single company. For example, a cosmetic company's makeup product line might include foundation, concealer, powder, blush, eyeliner, eyeshadow, mascara and lipstick products that are all closely related. The same company might also offer more than one product line. The cosmetic company might have a special product line geared toward teenagers and another line geared toward women older than 60, in addition to its regular product line, that can be used by women of any age.

INVESTOPEDIA EXPLAINS 'Product Line'
A good way for a company to try to expand its business is by adding to its existing product line. This is because people are more likely to purchase products from brands with which they are already familiar. For example, a frozen pizza company may wanted to increase its market share by adding frozen breadsticks and frozen pastas to its product line.